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Tuesday 4 November 2008
Commodity slump could herald worst recession since 1981
A record plunge in commodities may signal the United States is headed for the longest recession since 1981, just after Ronald Reagan became president and the economy began a 16-month slump.
Commodity slump could herald worst recession since 1981
Bloomberg in New York 4 November
A record plunge in commodities may signal the United States is headed for the longest recession since 1981, just after Ronald Reagan became president and the economy began a 16-month slump.
Industrial raw materials measured by the Journal of Commerce fell at an annual rate of as much as 56 per cent last week, the most since 1949 and worse than the declines before every recession since then.
Oil, copper and wheat tumbled more than 50 per cent from records this year as the US economy in the third quarter declined the most since 2001.
“The industrial sector, which was helping to keep the recession relatively mild, has completely given way and now we need to be prepared for a much more severe recession,” said Lakshman Achuthan, a managing director at the Economic Cycle Research Institute.
“It’s at least going to look something like what we saw in the early 1980s, but it could be worse,” Mr Achuthan said.
Goldman Sachs, once among the biggest commodity proponents, on October 23 said the risk of a “sharp global economic slowdown” might send prices even lower.
Codelco, the world’s largest copper miner, said this year’s price collapse signalled the end of a “supercycle” for the metal.
Walter Hellwig, a fund manager at Morgan Asset Management, said the commodity slump was “indicative of a global growth scenario with slower growth than what we’ve seen in more recent recessions”.
“It’s probably best to be underweight commodities now. Where the money goes is into defensive holdings, like consumer staples and stocks that benefit from lower commodity prices,” he said.
Equities outperformed industrial commodities in each of the past three downturns.
During the 16-month recession from July 1981 to November 1982, the Dow Jones Industrial Average gained 6.4 per cent as the Standard & Poor’s GSCI Index of 24 commodities fell 9.9 per cent.
Then, the biggest winners in the 30-company Dow index were Wal-Mart Stores, the world’s biggest retailer, Pfizer, the biggest drugmaker, General Electric, and Procter & Gamble, the biggest consumer-products company.
The MSCI World Index of stocks rose 9.8 per cent last week, the biggest gain since January 1970, as markets rallied in Russia, Africa, Brazil, Mexico, Europe and the US.
Not everyone expects a protracted decline in global growth.
US Federal Reserve chairman Ben Bernanke has been reluctant to label the current slide a recession.
The International Monetary Fund forecast on October 8 global growth would drop to 3 per cent next year, which the lender calls the dividing line between world recession and expansion.
“What you’re seeing here is liquidation by hedge funds,” said Stuart Flerlage, a fund manager at NuWave Investment Corp.
“That’s a meaningful piece of what’s going on out there in the commodity markets, in the equity markets, in the fixed-income markets. You’re in a fear cycle now. My overall economic view is it’s not as bad as people think.”
The Journal of Commerce Industrial Commodity Price Index measures 18 raw materials, including steel, burlap and plywood.
It was started in 1985 by Geoffrey Moore, founder of the ECRI and once a mentor to former Fed chairman Alan Greenspan.
Fifty per cent of the commodities are not traded on US exchanges.
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Commodity slump could herald worst recession since 1981
Bloomberg in New York
4 November
A record plunge in commodities may signal the United States is headed for the longest recession since 1981, just after Ronald Reagan became president and the economy began a 16-month slump.
Industrial raw materials measured by the Journal of Commerce fell at an annual rate of as much as 56 per cent last week, the most since 1949 and worse than the declines before every recession since then.
Oil, copper and wheat tumbled more than 50 per cent from records this year as the US economy in the third quarter declined the most since 2001.
“The industrial sector, which was helping to keep the recession relatively mild, has completely given way and now we need to be prepared for a much more severe recession,” said Lakshman Achuthan, a managing director at the Economic Cycle Research Institute.
“It’s at least going to look something like what we saw in the early 1980s, but it could be worse,” Mr Achuthan said.
Goldman Sachs, once among the biggest commodity proponents, on October 23 said the risk of a “sharp global economic slowdown” might send prices even lower.
Codelco, the world’s largest copper miner, said this year’s price collapse signalled the end of a “supercycle” for the metal.
Walter Hellwig, a fund manager at Morgan Asset Management, said the commodity slump was “indicative of a global growth scenario with slower growth than what we’ve seen in more recent recessions”.
“It’s probably best to be underweight commodities now. Where the money goes is into defensive holdings, like consumer staples and stocks that benefit from lower commodity prices,” he said.
Equities outperformed industrial commodities in each of the past three downturns.
During the 16-month recession from July 1981 to November 1982, the Dow Jones Industrial Average gained 6.4 per cent as the Standard & Poor’s GSCI Index of 24 commodities fell 9.9 per cent.
Then, the biggest winners in the 30-company Dow index were Wal-Mart Stores, the world’s biggest retailer, Pfizer, the biggest drugmaker, General Electric, and Procter & Gamble, the biggest consumer-products company.
The MSCI World Index of stocks rose 9.8 per cent last week, the biggest gain since January 1970, as markets rallied in Russia, Africa, Brazil, Mexico, Europe and the US.
Not everyone expects a protracted decline in global growth.
US Federal Reserve chairman Ben Bernanke has been reluctant to label the current slide a recession.
The International Monetary Fund forecast on October 8 global growth would drop to 3 per cent next year, which the lender calls the dividing line between world recession and expansion.
“What you’re seeing here is liquidation by hedge funds,” said Stuart Flerlage, a fund manager at NuWave Investment Corp.
“That’s a meaningful piece of what’s going on out there in the commodity markets, in the equity markets, in the fixed-income markets. You’re in a fear cycle now. My overall economic view is it’s not as bad as people think.”
The Journal of Commerce Industrial Commodity Price Index measures 18 raw materials, including steel, burlap and plywood.
It was started in 1985 by Geoffrey Moore, founder of the ECRI and once a mentor to former Fed chairman Alan Greenspan.
Fifty per cent of the commodities are not traded on US exchanges.
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